Crowdfunding Innovations Mired in Federal Delays

Entrepreneurs and consumer advocates are battling over government regulation of crowdfunding, the digital loan solution that lets consumers and businesses bypass traditional bank lending.

The Washington Post reported entrepreneurs and investors vented their frustration at a forum on crowdfunding portals in Washington, D.C.

Federal rules to allow crowdfunding as a legitimate loan source alternative in the United States are months overdue, beset by regulatory delays and fears by opponents that crowdfunding will enable widespread fraud against consumers.
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One speaker at the forum said those who are delaying federal crowdfunding authorization are themselves guilty of harming consumers.

“There’s another kind of fraud, and that’s when Congress and the president pass and sign a law, and thousands of companies organize according to the principles in that law … but academics and people in consumer groups who disagree with the law make it their mission to prevent the law from going into effect,” said Gregory Simon, chief executive of Poliwogg, a firm that’s building a crowdfunding portal for start-ups.

“Every day, I’m reading stories about legitimate businesses that are going to go out of business because of the delay in implementing [this] law.”

Simon accused opponents of preventing consumers from simply “investing in their neighbor’s business.”

President Barack Obama signed the Jumpstart our Business Startups (JOBS) Act a year ago, which legalized equity crowdfunding, subject to new rules being agreed by regulators.

The Securities and Exchange Commission (SEC) is drafting the rules, but The Post said mounting concerns over potential investment fraud and a leadership change at the top of the SEC has bogged down the process. Mary Jo White, a former New York federal prosecutor, was confirmed Monday as the new SEC head.

Mercer Bullard, a professor of securities and finance at the University of Mississippi, said U.S. securities laws dictated caution.

“If you want a market like we have in a lot of other undeveloped countries, then we’ll follow your lead,” he said in comments directed at Poliwogg’s Simon. “But if you want a full, competitive market that grows capital and jobs, you want one with investor protections.”

Crowdfunding websites helped companies and individuals worldwide raise $2.7 billion from members of the public in 2012, an 81 percent increase over the previous year, according to Reuters.

Many banks have tightened lending because of tougher capital rules and greater regulatory scrutiny, allowing crowdfunding to expand rapidly as an alternative source of finance.